Gold Price Forecast: XAU/USD recovers further from monthly low, upside potential seems limited

• Gold gained traction for the second successive day and recovered further from the monthly low.
• Retreating US bond yields weighed on the USD and benefitted the non-yielding yellow metal.
• The risk-on mood, Fed’s hawkish outlook should keep a lid on further gains for the XAU/USD.

Gold built on the previous day's post-FOMC bounce from sub-$1,900 levels, or the fresh monthly low and gained some follow-through traction for the second successive day on Thursday. The XAU/USD held on to its modest intraday gains through the early part of the European session and was last seen trading near the daily high, around the $1,935 region. As investors looked past the highly-anticipated Fed decision, retreating US Treasury bond yields kept the US dollar bulls on the defensive and acted as a tailwind for the dollar-denominated commodity. Apart from this, the uptick lacked any obvious fundamental catalyst and runs the risk of fizzling out rather quickly.

The Fed on Wednesday announced the start of the policy tightening cycle and hiked its target fund rate by 25 bps for the first time since 2018. The Fed also hinted that it would adopt a more aggressive policy response to combat stubbornly high inflation. In fact, the so-called dot plot indicated that the Fed could raise interest rates at all six remaining meetings in 2022. In the post-meeting press conference, Fed Chair Jerome Powell added that the US central bank could start shrinking its near $9 trillion balance sheet as soon as the next meeting in May. This, in turn, should keep a lid on any meaningful gains for the non-yielding gold.

Bulls might further refrain from placing aggressive bets amid signs of progress in the Russia-Ukraine ceasefire talks. Ukrainian President Volodymyr Zelensky said negotiations were becoming more realistic while Russia noted that proposals under discussion were close to an agreement. The optimism over a diplomatic solution to end the war in Ukraine remained supportive of the positive risk tone, which might further contribute to capping gains for the safe-haven gold. Hence, it will be prudent to wait for strong follow-through buying before confirming that the sharp pullback from the $2,070 region, or the highest level since August 2020 is over.

Market participants now look forward to the US economic docket, featuring the release of the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Industrial Production data. This, along with the US bond yields, might influence the USD price dynamics. Apart from this, traders will take cues from fresh developments surrounding the Russia-Ukraine saga and the broader market risk sentiment, to grab some short-term opportunities around gold.

Technical outlook

From a technical perspective, gold showed some resilience below the $1,900 mark and stage a goodish rebound from the 61.8% Fibonacci retracement level of the $1,780-$2,070 strong move up. The subsequent strength favours bullish traders and supports prospects for additional gains. That said, neutral technical indicators on the daily chart are yet to confirm the constructive outlook. Hence, any further move up is more likely to confront stiff resistance near the $1,948-$1,950 region, which is followed by the 38.2% Fibo. level, around the $1,960 area. Sustained strength beyond has the potential to push gold back towards the key $2,000 psychological mark, which coincides with the 23.6% Fibo. level.

On the flip side, the 50% Fibo. level, around the $1,925 region, now seems to protect the immediate downside. Some follow-through selling could drag gold prices back towards testing the 61.8% Fibo. level, around the $1,895 region. The next relevant support is pegged near the $1,875-$1,870 region, which if broken decisively should pave the way for a further near-term depreciating move. The XAU/USD might then turn vulnerable and drop to the $1,850 intermediate support en-route the very important 200-day SMA, currently around the $1,815 region.

Gold daily chart

Key levels to watch